Is Jiangsu Leadmicro Nano-Equipment Technology (SHSE:688147) A Risky Investment?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that Jiangsu Leadmicro Nano-Equipment Technology Ltd (SHSE:688147) does use debt in its business. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Jiangsu Leadmicro Nano-Equipment Technology

What Is Jiangsu Leadmicro Nano-Equipment Technology's Net Debt?

As you can see below, at the end of September 2024, Jiangsu Leadmicro Nano-Equipment Technology had CN¥1.55b of debt, up from CN¥422.1m a year ago. Click the image for more detail. But it also has CN¥1.95b in cash to offset that, meaning it has CN¥395.1m net cash.

How Healthy Is Jiangsu Leadmicro Nano-Equipment Technology's Balance Sheet?

According to the last reported balance sheet, Jiangsu Leadmicro Nano-Equipment Technology had liabilities of CN¥5.80b due within 12 months, and liabilities of CN¥604.5m due beyond 12 months. Offsetting this, it had CN¥1.95b in cash and CN¥1.06b in receivables that were due within 12 months. So it has liabilities totalling CN¥3.39b more than its cash and near-term receivables, combined.

This deficit isn't so bad because Jiangsu Leadmicro Nano-Equipment Technology is worth CN¥11.9b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. While it does have liabilities worth noting, Jiangsu Leadmicro Nano-Equipment Technology also has more cash than debt, so we're pretty confident it can manage its debt safely.

On top of that, Jiangsu Leadmicro Nano-Equipment Technology grew its EBIT by 39% over the last twelve months, and that growth will make it easier to handle its debt. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Jiangsu Leadmicro Nano-Equipment Technology can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Jiangsu Leadmicro Nano-Equipment Technology may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last two years, Jiangsu Leadmicro Nano-Equipment Technology saw substantial negative free cash flow, in total. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing Up

While Jiangsu Leadmicro Nano-Equipment Technology does have more liabilities than liquid assets, it also has net cash of CN¥395.1m. And it impressed us with its EBIT growth of 39% over the last year. So we don't have any problem with Jiangsu Leadmicro Nano-Equipment Technology's use of debt. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Jiangsu Leadmicro Nano-Equipment Technology you should know about.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.